Washington Weekly: Small Business Loan Fixes

U.S. Office of Public Policy, 05 June 2020

This Week:

The Senate approved various nominations and a House-passed bill to make improvements to the Paycheck Protection Program (see below). The House was out of session.

Next Week:

The Senate plans to reauthorize the federal Land and Water Conservation Fund (see below). The House will hold various committee hearings but hold no votes on legislation.

Coronavirus-Related Issues

Stimulus 4: the Next Stimulus Bill.

Our expectation for another stimulus bill remains the same as it has been for weeks. We expect the Senate to act on a bill of limited scope in July that will eventually become law. We expect the bill to include the following: an extension of additional unemployment insurance assistance; more funding (and greater flexibility on use of that funding) for state and local governments; temporary liability protections for small businesses, schools, hospitals and other entities during the reopening process; funding for more COVID-19 testing; and additional targeted improvements to the small business lending program, the Paycheck Protection Program (PPP). We believe a final deal will cost around $1 trillion. While the above list covers the key components of a bill that could pass the Senate today, changes in the political environment over the next month may affect the scope and contours of the final bill.

Small Business Loan Fixes.

The Senate approved a bill that would give borrowers additional flexibility on using funds under the $650 billion PPP. In particular, the bill, which passed the House by a 417 to 1 margin last week, would extend the timeframe that borrowers have to spend the funds (24 weeks instead of eight weeks) and give borrowers more flexibility in seeking loan forgiveness (a requirement that 75% of funds be used for payroll is scaled back to 60%). There was urgency for Congress to act given that early borrowers in the program had reached or were nearing the end of the original eight-week period in which to use the funds. Despite the Senate’s approval, some Senators have lingering concerns that they were unable to address under the time pressure. Notably, some are concerned that the bill extended the application date for the program from June 30 to December 31, which they view as unnecessary. Senators also are concerned about a potential cliff effect on the 60% requirement for loan forgiveness and want to ensure that businesses still are able to receive some amount of loan forgiveness even if they don’t meet the 60% threshold. Given these and other ongoing issues with PPP, we expect Congress to make further revisions in the next stimulus package.

Unemployment Insurance Transition Benefits.

Senate Republicans are moving away from an extension of the enhanced unemployment insurance benefits (an additional $600 a week through July 31) that became law as part of the more than $2 trillion stimulus package in March. They are instead examining proposals that would provide unemployed individuals with incentives to return to work. These members are concerned that the enhanced unemployment benefit is high enough to discourage many Americans from going back to work. The proposal that has received the most interest to date is one that would provide bonus payments of $450 per week through July 31 to those who return to work. While it is clear that the extra $600 per week will not be renewed beyond its expiration at the end of July, it is less clear what will replace it. There will need to be a compromise that balances helping the millions of unemployed with incentivizing people who can return back to work to do so.

Other Issues

Civil Unrest.

George Floyd's death has unleashed a nationwide lament and conversation about racial justice and potential police reforms. It's difficult to know where all this will go over the next few months (and longer), but there is no shortage of legislative proposals for Congress to potentially consider. National standards for police tactics, national codes of conduct for police departments, a ban on the use of chokeholds in police work, greater national oversight of police departments, and more funding for police training are among the ideas being discussed. Given that most law enforcement entities are local police departments, the more meaningful reforms are likely to come at the local level. Additionally, local officials typically are able to move more quickly than their federal government colleagues. We are just at the start of this discussion in Washington, but it seems to us that the power behind the moment is strong enough to keep these issues in the forefront for a long time.

Hong Kong.

Amidst China’s efforts to impose a new national security law in Hong Kong and to crack down on protests against the law, President Trump indicated last Friday that the US would begin to move away from the autonomous treatment it has afforded Hong Kong for decades pursuant to a 1992 law. In Congress, Senators Pat Toomey (R-PA) and Chris Van Hollen (D-MD) have legislation that would sanction Chinese officials involved in human rights violations on the island (and financial institutions that do business with those individuals). The bill has solid support and has the potential to move quickly in the Senate, just as a bill to de-list Chinese companies did two weeks ago. The Senate will work with the White House and try to coordinate with President Trump as he decides how to implement the new US plan for Hong Kong. The President hasn't yet signaled support for the Senate bill, and he may not want to have a new sanctions regime forced on him. While the President's support isn't required for the Senate to move forward, the chamber may not want to spend time on a bill that will eventually be vetoed. In our view, the administration and the Senate will need to spend at least a few weeks to coordinate and fine tune the sanctions bill before it would be in a position to advance in the Senate.

Tech Industry Again Under Fire.

President Trump issued an executive order last week directing federal regulators to reexamine the legal immunity that shields internet companies from lawsuits over third-party content on their sites. The regulators could tweak their interpretation of the part of the 1996 law that provided the industry with this broad liability protection or write new regulations clarifying the liability's scope and meaning. However, we don't expect significant changes in the foreseeable future for two reasons. First, any policy changes from the executive order will be challenged in court and delayed. Second, the most impactful changes would necessitate Congressional action. While the tech industry continues to be in the hot seat in Congress for numerous reasons, there isn't a bipartisan consensus on the issue of legal immunity. Indeed, many lawmakers actually regard it as necessary to free speech and expression. Do the internet companies deserve the liability protection given the potential for their platforms to spread harmful or false information? Who should determine the content of what users see on the internet? Congress' efforts to find answers to these questions and to strike a balance between ensuring free speech and curbing disinformation and harmful messages is more of a long-term project and will not be easy.

Land and Water Conservation Bill.

The Senate is expected to easily pass a bill next week to reauthorize the federal Land and Water Conservation Fund, which uses royalties from offshore oil and gas production to fund various conservation and recreation projects around the country. A big beneficiary is national parks, which have infrastructure and maintenance improvements funded through this program. This is not an issue of great importance to every voter, but it's still a nice bipartisan accomplishment at a time we don't see many of those. It's also a positive, albeit modest, contribution to our nation's infrastructure needs since many of these projects will upgrade roads, trails and bridges on federal lands. So, yes, the Senate is capable of passing something on an overwhelming bipartisan basis and we expect the House to follow suit in the near future.

Cashless Society?

Many businesses have shifted to become cashless, a trend that has grown since the outbreak of COVID-19. The impact has been noticeable. For example, Cardtronics, the world's largest operator of ATM's, saw a decline of cash withdrawals by nearly one third since last year. Some lawmakers are concerned about the impact of this trend on the millions of unbanked Americans who may have more limited options to purchase food and other goods. In fact, the state of New Jersey and a few cities already have instituted a cashless ban. Prior to the pandemic, Congressman Donald Payne (D-NJ) introduced legislation that would ban cashless stores, and the bill is getting a second look given current circumstances. The bill will not pass anytime soon, but it highlights the challenges that will occur to the extent that businesses and consumers continue to move away from cash payments as the economy reopens.

The Final Word

Swing State Economies.

With over 40 million Americans having applied for unemployment benefits, it is clear that economies across the country are struggling. These struggles are not evenly distributed across every state, and certain states are faring worse than others. Notably among these states are the "swing states" that will determine who wins the presidential election in November. Six states are widely regarded to be the most crucial swing states – North Carolina, Arizona, Florida, Wisconsin, Pennsylvania and Michigan – and the average of their combined unemployment rate (UER) was higher than the national rate at the end of April. Michigan is eight points above the US rate. Other states that may be swing states, including Ohio and New Hampshire, have UER rates two points higher than the US rate. COVID-19 defies boundaries, but it may have an outsized political impact in a handful of important states in the country. This presents a significant challenge to President Trump's re-election, and the UER numbers in August and September in these states are worth monitoring.